[Q: 16-1464278] Target Debt-Equity Ratio. A levered firm has 70,000 shares of stock outstanding that sell for $17.83 per

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Q 16 1464278 Target Debt Equity Ratio A Levered Firm Has 70 000 Shares Of Stock Outstanding That Sell For 17 83 Per 1 (30.72 KiB) Viewed 37 times

[Q: 16-1464278] Target Debt-Equity Ratio. A levered firm has 70,000 shares of stock outstanding that sell for $17.83 per share and it carries $624,050 in perpetual debt that it issued at a cost of 6.9%. It expects to earn an EBIT of $80,000 per year, in perpetuity, and faces a corporate tax rate of 22%. The firm's new management wishes to use a target debt-equity ratio of 0.4. To reach its target, it intends to raise funds using a seasoned equity offer (SEO) and use the proceeds to pay off some of its existing debt. The underwriter charges 5.0% of the gross proceeds as an underwriting fee and it is anticipated that the stock price will drop to $17.46 per share on the announcement of the SEO. Part A (5 points): How many shares will need to be issued to bring the firm's debt-equity ratio in line with management's target? Shares issued: (Round your answer to the nearest integer and use the rounded value in Part B.) Part B (5 points): What is the earnings per share (EPS) after the equity is issued and the proceeds are used to repay a portion of the debt? Assume the EBIT does not change. The EPS after the equity issue is $ (Round your answer to two decimal places.)